Watch out for the hidden costs of integrating IT systems

By Colin Rowland, Europe VP, Apptio

Law firms are increasingly being forced to think the unthinkable: to merge with a rival. With some finding it hard to compete and others seeking to opportunistically buy up corporate assets, the number of mergers has increased.

Unfortunately, the cost of integrating IT systems is often overlooked and, as such, can really impact upon profitability. During a merger, there is little incentive for IT teams to find synergies as, more often than not, some IT staff will be shown the door. This makes a pre-emptive audit a must.

Many of the costs that businesses pay for their IT are not easily identifiable. The value of a heavily depreciated asset may be overestimated, or the real value of a heavily-discounted enterprise license software agreement may be unknown. It is issues such as these that make direct value comparisons impossible.

The ability to commission new methods of IT provision such as cloud services and applications has added yet another layer of complexity when looking at the cost of IT in a law firm. In a merger where both sides use cloud computing, it is essential to know which provider to switch to.

When looking to integrate systems across merging firms that may have very different deep-rooted processes and capabilities, the first step is to achieve IT financial transparency. The roadmap to IT financial transparency will be distinct for every organisation, depending on the goals, data sources and supporting processes that exist.

Law firms often employ broad assumptions about the allocation of '¨their IT costs and, over time, move to '¨more complex approaches that rely on more granular and actual data to make accurate allocations.

The key is to break down the process into several phases that build up to delivering chargeback, where costs are allocated to the P&Ls of the lines of business, but this only happens after implementing internal cost visibility and then a shadow bill of IT.

This allows IT to first optimise its cost structure and potentially realign certain products and services. This, in turn, enables heads of IT to understand the impact of a changing cost allocation '¨model before charging against their '¨P&L or budgets.

One of the most important steps in creating internal cost transparency is to deliver service costing. This allows IT decision makers to understand the total cost of services (such as billing software) and technologies (such as servers). By transforming a finance-oriented view of IT costs into a services view, firms can identify where better data is needed in order to drive more granular reporting.

It is important to expose the actual cost for each service through activity-based costing (literally paying per service for email or online archiving), along with breakdowns for key cost categories such as hardware, software, people and data.

Service cost reports can expose both operating expenses and capital expenditures, while helping firms to understand labour costs, which are often the largest component of the '¨cost structure.

An analysis of external costs can help firm leaders to make better decisions about their consumption and begin to alter it to bring total IT costs in line with their perceived business value.

By performing consumption-based showback in parallel, you can understand the difference in charges caused by switching to a more accurate and fair consumption-based model.

It is also important to base cost chargebacks on actual consumption by the business and using published '¨rates. In doing so, IT can help to influence the consumption of IT services and therefore improve the alignment of IT expenditure with business priorities, without dictating which services the lines of business consume.

Finally, heads of IT need to understand the total cost of providing IT services, communicate the value of IT to the business, and strategically align the planning, budgeting, forecasting and controlling processes to IT services.

The end result will be that firms will be able to drive towards more effective use of IT, increase the transparency of costs and value to the business, and follow a proven path to running IT like a business.

In summary, when integrating IT systems across merging firms:

• establish a standardised method of categorising IT services;

• consider usage of the cloud;

• use business management techniques;

• push for financial transparency; and

• keep on top of your IT suppliers.

crowland@apptio.com